Last month, SEC chairman Mary Shapiro told the House Oversight Committee that the commission is reviewing the rules and restrictions surrounding the sale of private company stock. Current restrictions include, among others, a limit of 500 shareholders and the prohibition of general solicitation.
The SEC’s increased scrutiny of private company stock sales is the result of the increased visibility of these transactions, as shares of Facebook, Zynga, Twitter and other highly anticipated IPO candidates are in high demand and are being resold to other individuals or entities. New Internet-based platforms, such as SharesPost and Second Market, that connect buyers and sellers in these private transactions are also upping the ante. (There’s a good look at the issues in the New York Times’ Dealbook blog.)
Companies and boards are responding in different ways to this pressure. Some, for example, are placing additional restrictions on private stock transactions or implementing new governance and internal control policies.
Where this is heading and what actions the SEC might take are up in the air, though the SEC said it’s considering loosening some restrictions, eliminating certain disclosure requirements, restricting communications in IPOs, and other measures. All parties—sellers, buyers and regulators—have their own agendas and responsibilities. But it’s certain that oversight and administration of private company stock sales will be an increasingly common challenge for company management and finance teams.
However it plays out, if you’re a company with privately held shares, you’ll need to consider a number of strategic and administrative issues, including:
- Exercising the right of first refusal and other considerations such as co-sale rights
- Control and knowledge of the shareholder base
- Implications on your 409A valuations and future stock option pricing
- The need for trading windows around the transactions
- Implementing an insider trading policy
- Defining what information will be released to new purchasers